https://blog.bitmex.com/energy-cancelled/

(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)

The last major hydrocarbon energy shock occurred because Arab suppliers rug pulled the West. The Gulf States “lived their values” regarding the political situation in Israel at the time. This time the West decided to “live their values” and cancel the world’s largest energy producer. Don’t allow your opinion on the righteousness (or not) of the military action between Russia and Ukraine detract from the fact that this time around the Western energy consumer decided to go on strike.

I am 100% certain that there will be a financial crisis of epic proportions predicated on losses faced by commodity producers and traders who touch every aspect of the globalised financial system. You cannot remove the world’s largest energy producer – and the collateral these commodity resources represent – from the financial system without serious unimagined and unintended consequences.

Look no further than the antics that went down on the LME with respect to its Nickel contract. Jim Bianco laid it out nicely with this tweet. The LME is a dead exchange walking. LME is the canary in the commodity derivatives coal mine.

During the unfolding of this new global financial crisis, if you are serious about what the future holds monetarily for the various global factions, reading Zoltan Pozsar’s missives is non-negotiable. He is a money markets and rates strategist for Credit Suisse and pairs an excellent understanding of the intricate plumbing of global money markets with a clear and concise writing style. I don’t know if he coined the terms “Inside Money” and “Outside Money,” but I rather like how simple yet informative these descriptions of money and collateral are.

Inside Money are monetary instruments that exist as liabilities on another player’s balance sheet. A government bond is a liability of the sovereign, but an asset in the banking system that trades like cash depending on the credit quality of the issuer.

Outside Money are instruments that are not liabilities on another player’s balance sheet. Gold and Bitcoin are perfect examples.

The current PetroDollar / EuroDollar monetary system ended last week with the confiscation of the Russian Central Bank’s fiat currency reserves by the US and EU, and the removal of certain Russian banks from the SWIFT network. In a generation hence, when hopefully this sad episode of human history concludes, historians will point to 26 February 2022 as the date on which this system ended, and a new, currently unknown-to-us system sprouted.

I obviously have predictions on how this will play out, and that is the subject of this essay. Your moralistic opinions of the rightness or wrongness of different flags’ actions during this war should not distract you from the colossal implications to your personal finances.

As always, my task is to synthesise a wide range of macro economic thinkers who are better informed than I am, place their thoughts into my own vernacular, and relate them back to the crypto capital markets. Regardless of the speed at which this war subsides, the monetary rules of engagement will not go back to the post-1971 Petro / Eurodollar system. A new neutral reserve asset, which I believe will be gold, will be used to facilitate global trade in energy and foodstuffs. From a philosophical standpoint, central banks and sovereigns appreciate the value of gold, but not that of Bitcoin. Human civilization is approximately 10,000 years old, and gold has always been valued as a monetary instrument. Bitcoin is less than two decades old. But don’t worry: as gold succeeds so will Bitcoin. And I will explain why.

To kick it off, let’s ponder the prescient words of Zoltan from his 7 March 2022 note, entitled “Bretton Woods III”:

From the Bretton Woods era backed by gold bullion, to Bretton Woods II backed by inside money (Treasuries with un-hedgeable confiscation risks), to Bretton Woods III backed by outside money (gold bullion and other commodities).

After this war is over, “money” will never be the same again…

…and Bitcoin (if it still exists then) will probably benefit from all this.

It All Balances

The global economy is not a magic bean stalk that just produces bountiful yummy consumable goods. It is a balanced system, where some flags produce more than they consume, and other flags consume more than they produce. Both sides must balance, just like in all parts of life and the universe. Everything is relative, and nothing is ever created or destroyed, just transformed.

Every flag usually has its own domestic currency, that thang we call fiat. Depending on the natural endowments of location and other cultural factors, flags import and export different types of products and services on the global market. If everyone traded in their own currencies, it would introduce additional friction and cost. Instead, one flag’s fiat currency becomes the reserve currency, and most trade is conducted in that currency.